Capital Goods Under Haryana VAT

By

Sanjeev Malhotra F.C.A., F.C.S., A.I.C.W.A.

In today’s world of industrialization, putting capital intensive industry is preferred over putting labour intensive industry. Taxation of Capital goods thus, is one of the most important factors, an entrepreneur considers while putting an industry. In the era of VAT, this factor becomes all the more important, as heavy amount of tax is involved on the purchase of these capital goods. Due to this factor, it is desired that the law providing for taxation of capital goods should be unambiguous and also uniform in all the States. Whereas, it is not so. In this article, an attempt has been made to analyse these facts in reference to Haryana Value Added Tax Act, 2003. The readers are invited to highlight contrary views on the issue.

Definition of Capital Goods

In Haryana Value Added Tax Act, 2003, the term " Capital Goods" has been defined in Section 2(1)(g) to mean plant, machinery, dies, tools and equipment purchased for use in the State in manufacture or processing of goods for sale or in the telecommunication network or in mining or in the generation or distribution of electricity or other form of power, provided such purchase is capitalised.

The model draft VAT bill prepared by Prof. Atre ,Consultant to Ministry of Finance defines " Capital Goods" meaning plant, machinery and equipment used in the process of manufacturing excluding civil structures as may be prescribed.

Implication of words " provided such purchase is capitalised"

The capitalisation of a purchase is a prerequisite for the relevant purchase to qualify as Capital goods. What is meant by Capitalisation ?

  1. Does it only mean that any purchase of asset, which is accounted for in the category of fixed assets in the Balance sheet will qualify as Capital goods?

  2. Does that mean that any purchase of asset which is charged to Profit and Loss account in the very first year is not part of Capital goods?

For the purpose of further analysis let us take the example of capital assets of small value say Rs. 5,000/- each and also capital assets like motor and other spare parts :

  1. Which were fitted to a machine and capitalised by adding their value to the cost of the machine as additions done to that machine.

  2. Charged to repair and maintenance account and debited to profit and loss account in the same year.

All of us know that capital asset is charged to revenue over a period of time by way of depreciation. The Companies Act, 1956 allows 100% depreciation on capital items valuing less than Rs. 5,000/-. Thus, according to the definition the motor and spare parts, which were charged to profit and loss account directly will not qualify as Capital goods under the Act. The spare parts, which were taken to Balance Sheet as part of machine or as other fixed assets will qualify as Capital goods.

Eligibility of lower rate of tax under Section 7(2)

Let us now analyse that whether goods which fail to qualify as Capital goods as per section 2 are eligible to be bought at lower rate of tax of 4%.

Section 7(2) provides that the tax payable by a dealer on his taxable turnover ……………………………….. to goods of the description referred to in sub section (4) sold to a VAT dealer ……………………..

    1. ……………………………

    2. at four percent or such lower rate applicable on sale of such goods had it been a sale falling under clause (a) of sub section (1).

Section 7(4) provides that the goods sold to an authorised dealer referred to in sub-section (2) -

(a) are goods of the class or classes specified in the certificate of registration of the authorised dealer purchasing the goods as being intended, subject to any rules made by the State Government in this behalf, for use by him –

(i) in the manufacture of goods for sale;

(ii) in the telecommunications network;

(iii) in mining; or

(iv) in the generation or distribution of electricity or any other form of power;

(b) ……………………

(c ) are containers or other materials used for the packing of any goods or classes of goods specified in the certificate of registration referred to in clause (a) or clause (b).

Rule 18 of Haryana Value Added Tax Rules, 2003 prescribes the goods which can be purchased by authorised dealer at lower rate of tax. It prescribes as :

RULE 18. The goods referred to in clause (a) of sub-section (4) of section 7 which an authorised dealer may purchase, shall be goods intended for use by him,

(i) as raw materials, processing materials, packing materials, machinery, plant, equipment, cables, dies, tools, stores, spare parts, accessories, fuels or lubricants, in the manufacture of goods for sale;

(ii) as machinery, plant, equipment, cables, tools, stores, spare parts, accessories, fuels or lubricants, in the generation of electricity or any other form of power where such power is used in the manufacture of goods by him for sale;

(iii) as machinery, plant, equipment, cables, tools, stores, spare parts, accessories, fuel or lubricants, in the generation and distribution or distribution of electricity or any other form of power;

(iv) as machinery, equipment, cables, tools, stores, spare parts, accessories, in the telecommunications network; or

(v) as machinery, equipment, tools, stores, spare parts, in mining.

Thus, the goods which don’t qualify to be Capital goods as per section 2 are certainly Stores, Spare parts or accessories. Thus as per Section 7(2) read with section 7(4) and rule 18, there is no bar on purchase of such items at lower rate of tax.

Eligibility of Input Tax Credit

On many occasions, this fear has been raised before me that the input tax credit will be denied on spares and replacements which can are not capitalised. I am however not in agreement with this.

Section 8 dealing with input tax credit provides that "Input tax in respect of any goods purchased by a VAT dealer shall be the amount of tax paid to the State on the sale of such goods to him …………………………………………….. but shall not include tax paid in respect of goods specified in Schedule E used or disposed of in the circumstances mentioned against such goods "

Thus, following conditions need to be satisfied for eligibility of input tax credit.

  1. The purchasing dealer should be a VAT dealer.

  2. The amount of tax should have been paid to the State on purchase of goods by him.

  3. Goods should not be used or disposed of in the circumstances mentioned in Schedule E.

As goods referred to in our example will not qualify as Capital goods, it will be covered by the balancing clause no. 5 of "All goods except those mentioned at Serial nos. 1 & 2, which is as follows :

Schedule E

[See sub-section (1) of section 8].

Serial No.

Description of Goods

Circumstances in which input tax shall be nil

1

2

3

5.

All goods except Those mentioned At Serial Nos. 1 And 2

(i) When used in the telecommunications network, in mining, or in the generation and distribution of electricity or other form of power;

(ii) When exported out of State or disposed of otherwise than by sale;

(iii)When used in the manufacture or packing of exempted goods except when such goods are sold in the course of export of goods out of the territory of India;

(iv) When used in the manufacture or packing of taxable goods which are exported out of State or disposed of otherwise than by sale;

(v) When left in stock, whether in the form purchased or in manufactured or processed form, on the date of cancellation of the registration certificate.

 

Thus, Section 8 read with Schedule E does not restrict the eligibility of input tax credit on goods which does not qualify as Capital goods.

Effect of definition of Capital Goods

From the above we conclude that the provisio of capitalisation is of no affect either on eligibility of lower rate of tax or on eligibility of input tax credit. In the case dealing with the affect of definition clause, the Bombay High Court in the case of Mahomed Tayoob Daruwala Vs State of Bombay (1960) 11 STC 612 (Bom.), observed that "Even where an Act contains a definition section it does not necessarily apply in all the contexts in which a defined word may be found. If a defined expression is used in a context in which the definition will not fit, the context must be allowed to prevail over the artificial conceptions of the definition clause and the word must be given its ordinary meaning.

Thus, the requirement of capitalization appearing in Section 2 appears to be of no consequence. Readers are welcome to send their opinions in this regard.

31/05/2004